Saturday, September 18, 2010

Trading Rules

I keep observing myself when I do this trading method. I find it very difficult to establish good solid trading rules that I can stick to. Maybe I should jot a few possible ones down right now in this post.
The first one should have to do with frequency of trading.
When I first started doing this, I was thinking in terms of the Animal Crossing model. You can't do more than one trade a week there, unless you fart with the clock. You also have a VERY strict amount of time to be in the trade. This I am starting to stick with, even more than trying to achieve the profit goal.
The deal is, there are so many variables in option trading. When you come up with a rule, there are always logical reasons to break that rule, depending on the circumstances of the particular option. What I need to do is force the issue by only trading a certain kind of option, with regards to amount out of the money, and how many days before expiration, and always observe the way the stock is trading at the time of the trade. In other words, I need to ask the questions, did the stock just have a big move in a hurry? Is it in the middle of a trading range, or on the extreme end of one? I also need to look at my account and only trade if there is a proper amount of spare money to do one of these trades. If there's not, I must have the discipline to not trade. That means I am done in my IRA account. I have not done well with the cash in that account. Fortunately, it seems to be going towards selling more stock in there, so there should be more cash in there. I need to understand that the market could turn around at any time, and I don't want to leave myself with no cash when the time come that I am to buy more stock. Excuse me - I am writing about the wrong subject for this blog. That is for the AIM for Dogs blog.
I haven't really had a good trade since the NFLX trade. I have been using lower priced stocks that come from the Volatile Stocks site. NFLX's price is getting too high, and subsequently, the option prices are getting out of hand. I need to realize that these lower priced stocks aren't going to generally act like a high priced stock like NFLX. They generally trade in ranges, albeit large ranges, which I need to use to have consistently successful trades. My fault is that I get too anxious and want to trade too much. I need to cut that out. I don't have thousands of dollars to put into these trades, and I'm finding as my budget gets lower, the possibility of success goes down.
I made another observation that if I used multiple-contracts, I would save significantly in commissions, which when all is said and done, generally you just end up paying the commission out, because the net trade ends up about even, wins vs. losses. That's probably a thought to use for when I have a higher amount of cash to use for trading. That also would introduce more options for rule-breaking, like pairing out of trades by selling only part of the trade.
Options expired today - two of the RIG options expired worthless. I was able to salvage the call on WFMI yesterday - the stock was able to rally and go above the strike of the option enough that I could actually get a little money on top of the commission. The NFLX put expired - if I trade options on that stock again, I guarantee I will not sell it before it at least gets to the goal. I have left a lot of money on the table, not believing that the stock would run. Oh well, I was minding my rules, which what this post is supposed to be about, right?
By the way, the VXX trade I was able to get out of with only paying commission on it. The trade originally cost $110 and I to $90 out of the put and $20 out of the call on Thursday. I then bought a call option on the same stock for October, because I'm fairly sure that this stock can't stay at this level much longer. Kind of going against my whole plan here, but once again, my lesson is your gain.

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