The easiest place to begin to understand how options work and why the may be a good investment tool is to go right for the easiest to understand, the long call.  I remember that my first bit of insight into trading options was through a great friend, Marc Friedfertig, author of “The Electronic Day Trader”.  We were on the “D” train heading south into Brooklyn when my instruction began, and as with many, the long call was my beggining.

 We already know that buying a call gives the investor the right to purchase 100 shares of the underlying stock at a specific price up until the expiration date of that call option. But who should buy this option? This is a good position for those just getting their feet wet in option trading as it requires minimal skill and is easy to understand. An investor who believes that the underlying stock will increase in value, yet wants to invest limited capital and has no problem in absorbing the risk of the premium paid, yet still have a potentially unlimited maximum reward should consider buying a call.

 Buying a call is about as basic as you can get in options trading, which is why it is a perfect entry level trade into these types of investments. Later we will go over how this and other types of options can be combined to create other strategic investments to serve a multitude of purposes, but for the beginner buying a call is usually a great starting point.

 So, we have now purchased a call, referred to as long call, if you were the seller of the call, you would now be short the call, remember for every buyer there must be someone who has the contra point of view just as in buying and selling stocks. Your maximum risk is the premium you paid for the call, the maximum reward is unlimited and the breakeven point, (the price at which you would neither make nor lose money) would be the strike price minus the premium you paid for the call. Strike Price! Wait, you never mentioned a strike price! What the heck is that? Remember earlier we mentioned a specific price you can purchase the stock for up until the Call’s expiration date? That price is known as the strike price.

 In later articles we will not only go over other types of option contracts but how time decay and price fluctuations can also affect the price of the option. But for now, go to the Wall Street Journal or Investor’s Business Daily and notice how option prices and expiration dates are listed as this could be the subject of our next post on the basics of Option trading.

Although most of my posts deal with the art of Day trading or Swing trading, I have been asked by many to include information for those of you interested in trading options. Holding a series 4 license, I am qualified to discuss this type of trading but will do so in an informational capacity only. A primer to options trading so to speak. The Series 4 license is for managers supervising options sales personnel or supervising compliance for a FINRA brokerage firm.  Now let’s start at the beginning.

 What are options and what do they let us do? Options give the investor flexibility to put together a strategy or series of strategies to achieve a specific investment objective. Options give the investor leverage. It allows him or her to control more shares of a stock for less capital outlay.  In general, one option contract will represent 100 shares of a specific stock. If you bought 100 shares of stock XYZ trading at 25 dollars a share your capital outlay would be $2500. If you bought one option contract on the same stock you may only be paying a $2.50 premium and a cash outlay of $250 to control the same number of shares (1 contract = 100 shares x $2.50 = $250). So if you purchased a call option (the right to buy 100 shares of stock) you can control the same number of shares of XYZ stock until the specified expiration time of that option. REMEMBER: unlike purchasing a stock, if the option contract expires unexercised, you will lose the entire premium, in this case $250 dollars.

 Purchasing options allows the investor to trade with added leverage. Because we are controlling the same number of shares as if we purchased the stock itself with about 10% of the capital.

 Many investors, especially those who rely on income derived from their investments can also trade options to increase that income on a semi regular basis. If an investor owns shares of XYZ stock already, he can write (sell) calls against the stock he owns (this is known as covered call writing) and if the options expire unexercised the investor keeps the premium.  This is relatively safe as opposed to naked call writing which has unlimited risk the same as selling short.

 Depending upon the view of the investor as to the future direction of the stock and general economy, the investor can employ numerous strategies to take advantage of movements and fluctuations. Various combinations of buying and selling puts ( the right to sell a stock) and calls (the right to buy a stock) can allow the investor to profit from the numerous factors that cause stocks to fluctuate. 

 Options can also give the investor some protection from risk. The proper combination of owning stock, selling and buying options and the direction of the market can often not only minimize risk, but eliminate it altogether. With any type of investment there is risk, options can minimize risk, or be extremely risky instruments.  They are complex investments and require a great understanding of what they are, how to use them and especially what the ultimate investment objective is.

I was reading the message boards about a small stock that some friends and I have been playing for some time now.  The stock is Delcath (DCTH) and they have just presented the results of some trials at the ASCO (American Society of Clinical Oncology) conference this past weekend.   The results were interpreted by most as excellent but yet the stock fell sharply this Monday morning. One friend in particular may have done more research than most as he recently lost his father to liver cancer.  The message boards are now lighting up with the usual suspects bashing the stock for the shorts and pumping the stock for the longs. The real issue among this that most do not know whether they are traders or investors.

Many of us have been long this stock somewhere between 3 and 6 dollars a share and when it reached double digits have been selling into rallies and buying back on the pull backs. Others have held and will hold for the duration and not watch the market on a daily basis, while yet others will be happy with their current gains and exit completely as will those who entered positions late in this stocks rise and do not wish any further risk.

The point I am making is that you can’t call a stock a piece of garbage in which you rode it for 8-10 points, you can call yourself greedy however if you try to squeeze every penny out of a stock and it doesn’t go your way, (insert old adage about bulls, bear and pigs here). Decide first whether you are an investor or a trader and make your decisions taking into consideration your philosophy and material information.

Too many times we see arguments started on the message boards by those who not only have opposing positions but who have different philosophies as well. One man’s pain is another’s buying opportunity.  In the case of Delcath, it is true much of the recent rise was due to information that was leaking out over time on their phase III trials and anticipation of their presentations at various conferences. The drop may just be some profit taking which can present a buying opportunity for those wishing to accumulate more stock for the long haul. It could have also been an opportunity for short term traders to short the stock for smaller quick gains.

Keep your eye on the ball and decide what philosophy works best for your financial situation and mentality and then adjust to suit changes in the markets. Stocks are neither pieces of garbage or winners, the players who monitor and trade or invest in such issues can be.

I know I have not posted in a while and to be honest it was because my trades were working out well and I got cocky. I felt that I had a great understanding of the stocks I was trading and could do no wrong. Basically, I broke  my own rules about ego and thinking I knew more than everyone else. I’m not going to mention the stock I was trading as it was a relatively low priced issue that I have played with great success for some time. I guess its true, familiarity breeds contempt and this caused me to feel I was right and the entire market was wrong. Remember, psychology plays a huge role in market movements and going with the herd may not be such a bad thing, provided you get in early enough and out soon enough, before everyone else begins to second guess themselves and start exiting their positions.

My problem was that in this particular issue is that I felt that conditions causing this stock to decline were highly over stated.  Whether it was an increase in supply or socio-economic condition or climate or whatever, I took a stand that this issue was highly oversold.  I began looking at various technical indicators of the last 90 days and then weekly and determined it was time to begin to accumulate this stock. After all, it was an under $10 issue and rarely moved more than about .25cents in a day. Mistake number one is that I am for all intents and purposes a “day trader”, I should be looking for issues that I can get into make a quarter or fifty cents and be gone. That is my expertise or comfort zone so to speak.

The other mistake, (although this week, and trade was riddled with mistakes) was that the pressure of the herd was still pushing this issue down.  This meant that even if I was correct on why the stock seemed oversold to me, the selling pressure of the herd was still going to drop the price.  As a day trader, I could have made some money by entering and exiting judiciously throughout out the day, but another mistake was that I was getting greedy, and decided not only to accumulate this stock, but keep it overnight even though it closed down on a day when the rest of the market was up (big mistake when taking something overnight).  I made the excuse that this stock didn’t trade in accord with the rest of the market and found myself battling back from a disastrous opening the next morning.

I am not ashamed of posting this information publicly as it is my hope that this incredible number of newbie trader mistakes made by a seasoned trader may be recognized, and that even experienced trader such as me can break the rules. These mistakes although unforgiveable have been a blessing, as I am now more focused than ever and realize that the rules I trade by are not randomly thought up factoids, but the result of other people’s losses who have imparted their wisdom upon me, so I wouldn’t have to take major losses, as I hope my losses will assist you. My losses were not major as I still had many of my risk management rules in place, but they were avoidable. You don’t know more than the market as it is a living, breathing entity pushed by human emotion. Good luck and good trading!

Day trading Do’s & Don’ts

While I’ve worked in the financial world for some time now and hold my General Securities license, I know very little about the world of day trading, and curiosity has gotten the best of me. As nerdy as it may sound, I’ve decided I want to learn more about it after hearing my boyfriend talk about it and realizing I have been staring at him like a deer in the headlights with all the information virtually passing over my head. So after doing a bit of studying the subject of day trading and assimilating the information I consider to come from reliable resources, here are some tidbits I’ve picked up for anyone that has a similar burning curiosity:

If you are looking to start day trading for yourself, there are some behaviors you definitely do NOT want to emulate. For one, don’t be fooled into thinking that the more you read from a wide range of sources, the more informed your decisions will be. Subscribing to every financial publication out there will not serve you well; it will only lead to more confusion; there are such a wide range of methodologies, tactics, analysis & personal opinion on day trading that unless you are a seasoned day trader, you will only end up confused and annoyed and possibly making hasty trades based on your frustration level. It’s a bit like going to the racetrack and if you read a wide range of ‘professional analysis’ in addition to the pink sheet, and all the information has a different angle, you will probably end up just placing your bet on whatever horse looks the most lively or your preference for the color of the silks the jockey is wearing. Day trading is not something to go into uninformed, but you need to know where to get the best information.

Two major competing emotions, fear and greed

In the world of day trading: less may be more. It’s easy to get caught up in the excitement of seeing a trade come back with an unexpected high rate of return, but your success does NOT depend on the number of trades you place. In many ways, the day trading mentality could very well be likened to that of a gambler; they both live for the thrill of the game and the possibility of hitting it big. Don’t let this become and obsession; this is where poor decisions are made just for the sake of placing a trade and could have serious consequences.