While the ultimate goal in trading is to make money there are a slew of
fundamental performance tools and techniques that I can say need to be
drilled into anyone wanting to learn this game. Earlier you used chess as a
corollary but any performance activity can be used as a metaphor for
trading: tennis, hiking, poker, and on and on. If you pick up an advanced
book on chess and try to understand it - or worse toss it away simply
because it doesn't show you in simple terms "how to be a grandmaster" - then
the same kinds of frustration are likely.
I've been trading for 25 years and I'm still learning. I also, by this time,
do a bunch of stuff automatically without stopping to think about all the
whys and wherefores or even if it is the best play to make. It takes an
extraordinary teacher or coach to be able to convey little league basics
through major league nuanced strategy. In fact if there was someone who
claimed to do this they'd be lying. Unfortunately I don't think I've ever
seen any structured program or book that carefully takes a new trader
straight through to a winning professional. To make matters worse, the new
trader doesn't get the benefit of little league to start to learn the
fundamentals: every trade you actually execute is like facing the best pitch
of a major leaguer.
So how does someone learn? I'd say get some kind of tool that allows you to
simulate trades in accelerated time and do the exercises thousands of times.
The goal should be to win on balance and that means trying to find a way to
win on every single trade. You have to literally make trades (simulated or
real) to learn how to trade. And you have to either be very good at
self-monitoring what you are doing or you have to get a more experienced
coach to give you feedback.
The mechanical tools are always pretty basic: learn synthetics, get an
option risk graph tool that incorporates multi-leg trades, and then play
with variations. Just learning how to dissect using butterflies is a great
skill to develop but, like learning how to develop a proper batting swing or
mastering all the moves of a middle game in chess, skill development is
necessary but not sufficient for successful trading. Because the odds are so
extreme against most retail traders, it will always take something beyond
skill development to turn someone into a profitable trader.
-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of Ricky Jimenez
Sent: Saturday, May 22, 2010 9:59 AM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] Re: GS TRADE [was:How do you manage your
Vega?]
On Fri, 21 May 2010 15:31:12 -0000, "JP" <jamesbparker999@yahoo.co.uk>
wrote:
>Ricky
>
>Please don't take this as being in any way critical, but I disagree
completely with you regarding Cottle's book [Options Trading: The Hidden
Reallity] as it contains many examples of dissections and synthetically
equivalent positions.
>
>Michael's positions frequently end up with 'guts' options that can easily
be plotted on a risk graph, but not easily understood from the raw data
unless you apply some form of dissction.
>
>For example in the preface to Cottle's book he asks: what amount of money
is the most one can lose with the following position:
>
>QQQQ trading at 37.30
>36 strike call at $1.70
>39 strike put at $1.90
>
>A trader buys 10 lots of the 36c / 39p strangle for $3.60 ea.
>
>Have a go at answering without using a risk graph ..
>
>Cheers
>James
>
I agree, James that there are plenty of examples in the book but not
enough information how to go about using dissections to make money.
Buying or selling a box can simplify a position, but I need guidelines
on where to look for such opportunities and how they lead to profits.
I don't see why it is a virtue, not to draw a risk graph. Using the
mechanical table method I have shown before:
10*39p
10*36c
Slope: -10 0 10
Payoff: 30 30
Profit: -6 -6
BE: 35.40 39.60
so the minimum result is -6 in the interval [36,39].
I did try to find use for one of Charles' ideas, decomposition in
terms of "baby butterflies". After staring at his description for a
while, I saw that any position, in s region where strikes are at equal
distances, can be decomposed into a positive or negative whole number
of baby all put or all call flies. This becomes obvious if you
realize that a baby fly has the property that its expiration payoff is
the distance between strikes at its center and zero at its wings. I
thought that maybe I could buy a wide fly, say, and then sell off most
of the ATM babies as the underlying hit various strikes in between the
wings of the wide fly. But I soon found out that even with well
traded stocks like Google, ATM baby flies have very large bid/ask
spreads so I was not accumulating much credit by selling them.
But if you can give me a hint as to where to look for the really
useful stuff in the book, I will try again. :-)
------------------------------------
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