BigTrends

Let's face it...as options traders we are in the business of making money, growing capital and riding trends.  However, what if there is a sea change in those trends?  How capable are you of holding onto your funds, hence PPT (protecting precious capital)?  There is a time for action, there is a time for inaction.  As I have traded for many years there is a constant reminder to be rational and sensible in times of panic and euphoria.  Don't get too greedy, don't get too fearful.  We maneuver around markets to find the best setups and take advantage of the momentum that can move briskly in our favor.  When that advantage is taken away, you have but ONE option for survival:  C A S H.

Being in cash is a position, it's a decision and it keeps you around for another day.  The whipsaws we've seen lately as the markets try and figure out Europe, Goldman and other issues have put us on the sidelines for now, as this is not an environment to be playing in.  Some of you may enjoy this action;  heck, you might have just as much fun dodging oncoming traffic.  For me, I'll wait until there is some certainty and the fear subsides, or increases.   This waiting will increase my confidence when we step into the game again, knowing full well that the market is accommodating to my trading system and will not be pushed around or running in place.

Our good friend, Mark Wolfinger, author of The Rookie's Guide to Options recently posted Q&A on the infamous topic of, what order type is best for options traders.  Great insight from Mark, as usual...

Question: How much of a better price can I expect to get with limit orders? I just started trading US options, but am based in Australia. I generally don't watch the market - and work off yesterday's closing bid/ask prices.
NK

Answer: I assume that you enter a limit order based on what you noted the night before.  If you enter 'market orders' please don't do that.

When trading options, entering such an order is an invitation to receive a terrible fill, and there is little chance that you will get a fair price.

Entering a market order at the opening is much worse.  It's difficult to imagine being so desperate to get a fill that you are willing to enter a market order at the opening of trading.

If you want to trade the opening, limit orders are mandatory.

'Yesterday's closing bid/ask prices' are almost always bad.  By that I mean they no longer represent the true market the following morning.  Why?

If you're interested in taxes and how the government is spending our money, as I suspect you are, then you'll find this tool very enlightening...  Go ahead zoom in (scroll on the mouse) to read where every single penny is being allocated.  (compliments to WallStats)

Ever heard of the 80/20 Rule, also known as the Pareto Principle? Dr. Joseph Juran, the total quality management guru, developed the Pareto Principle after studying the work of Wilfredo Pareto, the nineteenth century economist. The Pareto Principle states that a small percentage of your efforts (typically around 20 percent) will create a large majority of your results (usually around 80 percent).  Expanding Pareto to trading, it follows that roughly 80% of your profits should come from only 20% of your trades.

In options trading, the numbers can be even more dramatic. In the table below, I looked at all of my options recommendations over a 6-month period.  Starting with a $50,000 account, investing 15% per trade, and including commissions, an investor taking all trades finished the six-month period with a total value of $216,560.  In contrast, I sorted out just those trades which managed to gain 100% or more in that period.  Notice that there are a number of 'half positions', per my goal of selling half of my position at a double or more to create the No-Risk Trade.  Adding up all these full and half positions, there are 8-1/2 positions out of 64 than doubled or more in that period.  That's 13.3% of my trades, and they accounted for more than 100% of my profits, as these trades alone totaled an account value of $245,982!

Table: The 80/20 Rule in Trading