Addicted To Options

There were a lot of good questions that came through the chat last night about options and the selection process of an option. This has stirred some great ideas in my mind, and I want to make sure that everyone has a fairly good understanding of options before they really start to trade them.

The truth is, you can't get by just buying in the money calls or puts on every trade and expect to get by or even make money in the long run. Since options are built to defeat you, you need to have a good understanding of how they work before you risk anything. I relate this to my first experience at a craps table. I hate to use the gambling reference, but it applies. Have you ever seen a craps table? How can you make sense of every little detail that is on that stretch of felt? Better yet, how can you place your chips on there with any confidence knowing that there are so many choices for better or for worse. What does it boil down to? In my eyes, it boiled down to the probability of the next roll of the dice.

If you have in your mind a one-size fits all to option trading, you need to lose that mentaility. The truth is, every trade is different. It is just another roll of the dice. Each option will be priced differently, each underlying stock will move differently, each option will have different sensitivities, etc. Options are the only sport where you can be right and still lose money, or be wrong and still make money.


I created a trading room last year that was dedicated to options pricing & volatility. Here I wanted to discuss various pricing models, greeks, theoreticals, etc. After the company wouldn't advertise it and I was fed up with the comments about people wanting more "free trades" I washed my hands with it. Truth is, I think this should be a prerequisite and a final exam should be passed on it before putting a nickel in the options market.

For those that attend Mastertalk, I will be teaching this subject tonight. If you can attend, try. I have had problems with my recordings forever and I imagine that they haven't fixed any of my problems yet.

I'll be around. Jodi, give me a call if you want to continue the discussion.

Recommendation: Become addicted to options. Seriously.

Long: JBX. The company that keeps on giving.

Short: CME....One day does not make a trend!

I wish I was part of the master Talk, but Dang I am not.

If there is any other way to get this material, please point me in the right direction. I'd love to take that test.....

Great comments!
By the way, I listened to your Options and Volatility classes last year. Excellent discussions. I am stuck in the ITM rut. This is all I trade and it isn't good.
Looking forward to Mastertalk tonight.

Brett,

Wherever you are, keep shoveling down the burittos and keep those lips on the mocha jug..he he...

Bob,

I sent you an e-mail. I'll take care of it.

Jeff

Hey Jeff: I am in Bob's camp as well if you can

Thanks

DavidS,

Email me....

Jeff,
You have stirred a desire in our loi... er brains. I really thought I was starting to get this whole options thing and you've just made us realize that we haven't got a clue (well... that may be a bit of an exageration. We have a clue, but Mr Plumb needs more than a candlestick to make sense of it all.) All we've been trading is ITM options and although it makes me all warm and fuzzy... it just doesn't seem to be the whole answer. Now I know it's not.

We can't usually listen to Mastertalk live but we will be sure to catch the replay (is it live... or is it Memorex?)

Thanks for once again awakening the desire to keep learning on this long road to success.

PS today sucks. Calls are down and puts are up (except for AVB which Brett will be sure to remind me I was a MORON to get out of yesterday morning, right as it peaked.) The good thing is that I'm now just looking at each trade and assessing whether the trend is still valid or it's done. I think TSO is done. I'm feeling better about a crappy day like to today, because I know that everything I hold (OR DON'T HOLD ANYMORE!!!) is doing what it's supposed to do. Just out of synch with the market. But that's OK because I was up a bunch on the last down day.

With more gratitude than we can possibly say (because I'm tired... and basically a lazy individual)

Chris and Catherine

all brazilian stocks are moving like crazy

bbd amx sbs

Jeff,

I'm with Amy, I was stuck as an ITM trader ever since attending my 3 Day in Utah back in 2005, even though I believe my instructor, Robert S., was giving me the proverbial "wink wink" about sticking to ITM with 70% intrinsic value only.

Its better to learn about option pricing and volatility before the Market teaches you!

Glenn

Jodi Canuck,
Actually I live in Oakville (near Toronto) but I'm in Edmonchuck today. Get to Calgary from time to time. We should get together at Tim's some time and have a cuppa Joe and some timbits... discuss options and various other addictions.

By the way I don't travel with "The Bag" (of hammers) but Stephenson's rent-all probably would have some.

TSO

We're into the last hour here and it's as low as I'm willing to let it go. After AVB yesterday, I'm going to let this one live another day but there's a piano with a bag of hammers on it, hanging over it's head. And it's not one of those dinky little play-toy-pianos. It's a Grand, baby (as opposed to a Baby Grand...)

Thank goodness for PCP, GS, and CMG (see Brett, your money is not being wasted there) otherwise it would have been a disasterous day. I'm buying stock in DQ. Those Kit Kat Blizzards are the best. But up in Canada we can't multi-task, so we don't have the "twirly" ice cream. Vanilla only. I could call it Vanilla Ice.

Chris and Catherine,
I let myself get stopped in TSO. It's not in my comfort zone and I don't like the trade anymore. Closed out some of my plays and gonna wait til I am feeling more confident in myself. That's what they recommend in the Market Wizards books when you are having some losses. That would be me this week. Gonna hold on to my BUCY and GS and my couple of puts and just watch for a while and wait for that COMPELLING trade to come to me instead of jumping into trades that I don't have conviction about. GO JBX for whoever got into it. It has made its move and too late to enter, but a great trade for those that did.

Randall and Michelle

C&C-
My husband is from up north. We're suppose to be going there this summer to visit his family. They live out in the middle of nowhere... Lloydminster. We usually fly into Calgary. I know it's not anywhere near Toronto but maybe you'll be out near Calgary again when we're there.

Jeff-
The last few times I've tried to listen to your master talk it wasn't even listed. I don't have the opportunity to listen to it live (small children) so I listen to the recordings but they're nowhere to be found and I am definitely interested in listening to this one. I always get the same response... we're working on it. Suggestions?

Thanks.

liz
pasadena, ca

Jeff,

Is there some reason Brazilian stocks are moving today? Maybe there is some news you guys know about.

Randall and Michelle

liz and grant,
If you can let me know the date you're going to be arriving in Calgary I can arrange to be there. If you guys are into hiking and stuff we could meet out my Banff (if that's on the way to Lloydminister) and grab a coffee and maybe even do a hike.

I have to put my schedule together a month ahead, so if you let me know by the 15th of the month before you're going, I could probably even drag Catherine out.

That'd be cool

So looks like group therapy on MasterTalk tonight with Jeff, Live/Recorded.

Jeff, do you have enough couches, can we all squeeze in?!

I'm still in TSO, looks like it's going to stay above 112.50 support...if not, I'm hoppin' off that train. I feel like I've been dragged under it most of the day, thank goodness for: GS, AVB, BA and even the SUN DECK are looking a little brighter!

Hey, I hear the Bulls stampedin' their way back in, TSO might even make it to 115 support! Yee-Haw!

Chip,

i don't think that is the bulls..I think it's the deer chasing Brett looking for their.....

GOOG....got me some....

Brett,

Thanks for clearing BIDU for takeoff. It made a nice move at the end of the day. Now if you could just give it clearance for a higher altitude, I would appreciate it.

I held onto TSO as well. It was a tough call for me. It was a little less than 1% below my identified exit point, and given the magnitude of its recovery over the day, and the fact that it clawed back near those previous lows, I thought it was worthy of another day.

These are the subjective decisions that are tough and right now I'm testing the "patience" theory. We'll see how it goes. Here's hoping for that bounce tomorrow.

S&P is right at its all time high....very exciting times, can't wait for tomorrow
Ladd

Hey, lots of us holding onto TSO today. Here's to hoping it pays off. To me, it looks like there's some strength left in it. We will all hold a group hug if it works out.

Gotta hop on that old jet plane and catch the red eye back home tonight. Jeff, I hope the Master talk archives are working as I really, really want to hear what you have to say on ITM and OTM optioning.

Might as well face it we're addicted to... options.

Ladd is still long some TSO

Why don't I hear more talk about my realty stocks? KIM, ESS, ETC!

What about the double top on ASFI?

Oh yeah, revver hasn't approved my price patterns video yet...

*@$^&(*@^$*^$!!!!!

Jeff,

Probably because we haven't been paying attention like we should have. Whoa! Just looked at those babies. What nice put plays. I am gonna have to do some analysis on those.

Randall and Michelle

Jeff,
I can see resistance on KIM and ESS, but ETC chart looks weird to me. Where do you see resistance?


Michelle

Also,

How do you figure target prices on KIM and ESS? They have moved nicely, but how do you determine on a put what its potential is?

Michelle (and Randall)

_____Chris & Catherine - I'm with you_____

I can't believe this day. It's been busy so I haven't gotten through all the comments, but I can't believe the S&P was up so much and ALL of my calls were down and my puts were up!

Wow, what a day...!!!

Gary

Um...Michelle, I think Jeff meant etcetera.

...and I just shorted the crap out of ETC on Jeff's recommendation. DAMN IT TO HELL!!!

I have been following ESS since I wrote the market cast about the H&S on this (as well as AVB) back on 4/12. I did not play for two reasons. 1. I am already short on AVB and KIM. 2. Was not really crazy about the volume? do you agree Jeff?
Thanks
Ladd

Jeff-

Are your videos on youtube? Can we have the link again... please!


Thanks!

liz
pasadena,ca

liz, the videos are on youtube. The way I always find them is search on "jeff kohler" then click "channels" on the left and it will bring up a list of all of his videos.

Gary and C&C, I came back to find that I have had the same day in my account that you had. I am in ESS but had to get in early as I was back on the road so even that PUT is up a bit. Jeff, I will be there with you tonight (maybe Pam too). My OTM of the experiences have been less than successful. C&C, POT was up a bit. X, VIP and TSO have pulled all the virtual profits out of my account and then some. At least I am not in ETC!

Is ETC forming a "Pteradactyl"? (kudos to Eric Utley)
Ladd

Gosh that is hilarious. I needed that laugh after the pounding my account has taken this week.

The market was up and all my positions .... well, sucked.


Michelle (and Randall)

P.S. Glad I wasn't in ETC, (laughter)

Yeah, I got kicked in the nuts today too! I guess all good winning streaks need to come to an end. A special thanks goes out to TSO and EEP and… I got stopped out of my TSO options while I was on my way to work. I even had my stop at 50% of the value of the ATM option. This is the second time in a week. I have had real good success with having my stops for ATM options set at 50% of the option over the past few months. Mom always said there would be days like these…

The plus is, I only had to jump ship on two trades and I have a plethora of trades working my plan right now. All can change at a moments notice, stay tuned.

Jeff, I hope those jokers fix your recording problems because I missed your last Mastertalk and was much more pissed than what EEP did today. Where is the complaint department?

Everyone! Thanks for all the blog comments today. That should cut into about of an hour of my sleep tonight. I know, I know, sleep is overrated. Besides, we can sleep when we are dead.

Tomorrow, same time same station!

Thanks Tim!

liz
pasadena, ca

A Small Token of Thanks,

I have included my links to a few nuggets of gold that I am currently in as of today and thought it appropriate to give something back to such a wonderful group of traders. Thank you all for a great trading group site! I love the interaction and comments.

Oh and thanks Jeff for hosting this site and for your awesome posts!!!

AEM

http://img178.imageshack.us/my.php?image=aemmay1607dtmj3.gif

AMZN

http://img299.imageshack.us/my.php?image=amzn3monbullflagkx3.gif

ESS

http://img299.imageshack.us/my.php?image=essmay1607dtcw6.gif

Ben C.

Thought I'd go out for a run today to clear the cobwebs forming by the "down" day in my account on a very "up" day in the market. Always seems like such a travesty to "waste" a good market day.

Just about got hit by lightning on the run. Decided life was too precious. Cobwebs will have to remain firmly ensconsed in the brain. Maybe when I get off the red eye tomorrow morning Catherine will run me over with the car.

But in all honesty I only sold one option today. ISRG had most assuredly broken it's trend and I got out with a very small loss. Everything else is in the groove (although TSO is playing mind games while barely balancing in the groove.)

Feel the force, Luke

Ben C,

2 out of 3 of those nuggets were on Mondays video Jeff posted in case you missed it.

Jerry

Jeff,
I jumped on KIM yesterday with a small position. I would have taken ESS but it didn't really confirm until today and I'm already in AVB so that would leave me too heavy in one sector. Plus, I'll be traveling most of next week and don't want to worry about option trades while I'm gone.

It's interesting that today, when so many of you are saying that your accounts went the wrong way, mine FINALLY was going the right way (except for TSO).

Later....
Doji Girl

Doji Girl,
I'll have to sick my Doji Dog on whatever you were smoking today. Congrats on a good day. That's the way it should be when the Dow's up over a hundred points!!! One "attagirl" and a pat on the head to you. We now bow to you in homage.

I'm sure Brett was up today too, he's being 'way too quiet.

This comment has been removed by the author.

ESS broke today on average volume. I managed to find an option to buy despite the crazy spreads but had to go fairly far ITM to find one reasonably valued.

MikeH

Anyone else notice the new download link on the MarketCast inside Investools? Nice. And it works! My ipod will be so happy. Thanks, Jeff.

How was the Mastertalk? I couldn't justify starting a two plus hour MT at 11 so I decided to read today's blog comments instead... I must be crazy.

Cheers to 5/17 being a great day!

Good morning all, Jeff I tried for a question on Mastertalk last night but had to log before you got around to me. So maybe you can take it heare.

When the bid/ask spreads are a dollar or more on a stock you think is breaking out, how do you justfiy the option? I noticed the spreads on AVB and ESS are outrageous whether your ITM or OTM. I assume this is due to low liquidity and open interest. Do you justify the bid/ask penatly based on the expected move of the stock, meaning in needs a big forecasted move to cover the spread?

You could really get stung if the stock moves against you with that large of a spread.

MikeH

Had computer blow-up late in the day. Jeff saw your comment on the REITS. I thrown this out there a couple of times...

Watch the IYR it is the REIT ETF. Pull up the components for a watch list. If your afraid of one stock buy puts on the ETF. Look at that break of support. Beautiful and bought inexpensive puts that are liquid.

If the IYR is breaking down so are the components. I have puts on SPG,AVB,PSA, IYR and ESS.
ESS had a nice H&S breakdown. I looked at the July 120 Puts when it was at 124+.

I am sure some people looked at the market. My screen said 2.45-5.90 (what the Cr$%#). Sometimes those are just electronic markets with nobody looking at them. I put in a bid of 2.60 and offered 1 at 5.80. The offer came down to 4.90 the bid went up to 2.70. (Now we're getting some where). I raised my bid to 2.75 and offered 1 a 4.80. I guess I woke the market maker up because now the market went 2.85 to 3.30. Now we have a manageable market. I bought a little later at 3.20. So if anybody likes the trade there is now some volume on the ESS July 120 puts.

These trades will take patience. The patterns are very bearish but the move I think will be slow. Everybody thought the Homebuilders would crack like the internet stocks of 2000. They just did a slow slide lower for 2 years. I guess the REITS are next.

Jamie

FAF is bouncing down from its retest of a triple top.

MikeH

Jamie, you read my mind, I've been wondering if there was a ETF on REITS and this is just what I needed. Thanks. Oh, and I also did that little trick on ESS, throwing out some bids to see how the bid/ask would adjust and managed to get a price I wanted but now that I own the puts, selling them with that bid/ask will be a challenge if buyers don't increase. MikeH

Did anyone jump on the BNI train yesterday?

I know volume was not great, but I was comfortable with the risk reward so jumped on.

HOG

Still in the trade, right at my line in the sand though. A close below $62 and I am out...

Bob,

I did. Also took down ALD.

ALD

Not on my radar....missed that one.

Keeping my eye on ATI...

HOG is toying with me this morning...

I'd like to see GS close above $228 today...that would put a smile on my face..

Brett,

Here is another stock that was "happy to see you".

DJ

Also, take a look at KSU (also in railroads)

Good morning bloggers!

Checked out KSU. Nice.

ASEI looks good this morning.

Glad I got out of PLCE yesterday. I thought it looked like it was going to bounce back up. I'm going to catch it again if it re-tests 50.

I'd like to shoot ISRG but it's not at my exit yet. Still...

If it wasn't for PSA & POT my portfolio would be down, down, down... YEAH for PSA! YEAH for POT! Especially us Californians! Just kidding!

liz
pasadena, ca

Yes, POT, PSA, ASEI all look nice today. X and VIP ...
I am trying that patience thing on PLCE as I entered on 5/3 @ 53.58 rode it down and if it bounces off say 53-54 for the next leg lower I am in as I have time I think with a JUN option.
Quiet on the blog today. Like KSU thanks for that one.

Dna is still behaving and approaching its next support level at approx. 77.5.

I am not it POT or PSA so I guess you could say I don't have a POT to PSA in:).

I think it is that time of day when we need Brett to suck down a mocha and eat a burritto...

I am going to have pony up and have an expresso myself....

x looks like a good risk reward as it has horizontal support and trend support

NM I think is poised to move higher they had great earnings but they said they would sell more shares also good risk reward

Sean,

Funny and witty!!

Rd

Davids hope you are right as I am in both. BTW the Mastertalk was great last night. I am just starting to trade OTM options for those with big move potential.

I like X as well, but I am going to wait until it is finished pulling back. It may pull back a bit more, especially if the market overall pulls back from where it is now...

X, I agree, maybe wait for it to turnover
And yes, great master talk last night (I have been guilty of buying an ATM, not any more)
Ladd

check out MUR (breaking out) and Btu APA

Cvh good entry right here

CPA also looks good but not optionable

Bud head and shoulder I think it will hit 49 and then move lower, Buffet sold all his shares and the news was on CNBC that will prompt sellers

Morning addicts,

Another day in the crapper as far as virtually all my options are going. TSO is rewarding our patience nicely, though. STX is bouncing back down. That's it for my winners.

X and AKS are both very very close to support and worthy of a long, hard look. Any jump in them will pay handsomely (like me... the handsome bit, anyway. I don't pay nobody for nothing.)

Brett CMG is obviously missing you. Get out there man, and BUY BUY BUY!!!

Speaking of which BBY may be hitting resistance, but I'm not touching it. I'm not pleased with how it treated me in the past. How's that for not being emotional.

Have to listen to Master Talk this afternoon.

nice bounce on TK in the red hot water shipping segment.

MikeH

CTRP breaking to all time high.

Anybody else having problems with the Investools site?? I can't get back on. Prophet charts have been very slow for the last 30 minutes.

This comment has been removed by the author.

Looks like IT and Prophet are down again!

Yes, I am having problems with invest tools as well. Seems that ever since they upgraded the site (which I like, I have off and on problems. Very frustrating to say the least.

I started using the OA charts anyway, they are much better..

I started using the OA charts anyway, they are much better..

What are OA charts?

Option Addict charts? ... We have our own charts?!?!

Cool

MikeH,

The only way I can justify a huge spread is potential reward. If the spread makes up too big of a percentage of the option, I will go long/short the stock. A wide spread can kill you as an option trader, so if you are ever in doubt, try to select another option, or even worse, pass on the trade. Try another company in the same space with a similar set-up.

IT looks like it's back up.

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...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT... ...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...

About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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