| Successful traders learn to follow a set of rules | | | | expensive for these stocks - except during the |
| consistently. These set of rules are called a trading | | | | expiration week. Remember, options basically trade |
| system. When using stock options, it is very | | | | on the stock price difference, whereas stocks trade |
| important to use a stock option trading system. | | | | on the total stock value. A $200 stock with a 5% |
| Traders really need to backtest several stock option | | | | intra-day range has a 'difference' value of $10. That |
| trading systems and avoid commonly taught systems | | | | $10, in absolute terms, can cause some wild swings in |
| that result in a net loss over time. A 'fun' stock | | | | option prices during a certain time of the month. |
| option trading system involves high flying stocks | | | | Let's look at a stock option trading system that tries |
| Google, CME, or RTP. I call this a 'fun' system | | | | to take advantage of expensive stocks fluctuating |
| because you should only trade with money you can | | | | during the time of the month when options are the |
| lose. In this system, you should really trade no more | | | | cheapest: |
| than three contracts. The system is for illustration | | | | 1. On the Monday before option expiration, buy three |
| purposes. Remember - options involves risks - | | | | strangles on Google, CME, or RTP that are 2 strikes |
| including losing your whole account if you do not | | | | out of the money for that expiration. For example, |
| manage your risk and size you positions properly. | | | | on Monday, May 15th, with expiration Friday on May |
| The leverage of stock options can cut both ways. | | | | 19th, Google is at 400. Buy the 420 call and the 380 |
| You can lose faster as well as win faster with stock | | | | put. If it is not earnings month, the strangle should |
| options. Therefore, you want to get past the point | | | | cost around $300 to $350. |
| of trading because of emotions or addiction and | | | | 2. You'll have to watch the price quote most of the |
| trade by your rules. Of course, your stock option | | | | day for Tuesday, Wednesday, Thursday, and even |
| trading system needs to be backtested with lots of | | | | Friday |
| samples to ensure you have positive expectancy. | | | | 3. Try to estimate based on chart patterns whether |
| Positive expectancy means that when you trade | | | | a certain time is close to the high or low for the day. |
| many times over the long run, you will have a net | | | | Better than that, if the price of the total strangle is |
| profit. You will be surprised that some stock option | | | | profitable by $60 or more per strangle, sell one. |
| trading systems being taught or sold may have a | | | | That's a 20% profit. The normal intra-day range for |
| NEGATIVE expectancy in the long run. That is, you | | | | these three stocks swings enough to cause some |
| will be trading at a net loss. They may have worked | | | | profit. |
| in a strong trending market a few years ago but | | | | 4. Repeat step 3 on Wednesday and Thursday. Many |
| they do not work in our current 2005-2006 stock | | | | times a year, there is a news event that can cause a |
| market. | | | | $10 to $30 move on a single day. These are the |
| One way to see explosive results is to focus on | | | | home runs you are looking for that can more than |
| stocks that are expensive and that have a high | | | | cancel the strike outs of the relatively inactive days. |
| intra-day range - or average true range. Google, CME, | | | | This stock option trading system has precise |
| and RTP are in the $200 to $500 range. In fact, | | | | definitions for entry and relatively precise definitions |
| there are not many other stocks over $200 that | | | | for exit. Trade like a robot one week a month. In |
| have options besides those three. Normally, options | | | | future articles the detailed backtesting results of this |
| two strikes out of the money are relatively | | | | system may be presented. |