# Friendly Message to Newbie Option Traders



## happytrader (6 October 2005)

Hello Fellow Traders

If your stop loss has been breached or is threatened, please, please, please exit your trade.  Unlike sharetraders you and I do not have the benefit of time.  Believe it or not you will survive a 20% or even 50% loss or even more. However, the psychological and financial damage you may inflict on yourself if you ignore or deny the situation can be immense.  Take action! By protecting your capital you protect yourself.  These are my heartfelt words from long hard experience for the benefit of my fellow trader.

Happytrader


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## mikeg (6 October 2005)

*Re: Friendly Message to Newbie Optiontraders*

I agree, if you want to stay in the Options Trading arena then the No. 1 rule is to protect your capital. Admit that you made a mistake, or that the market has changed direction and get out when it hits your stop, or even before if you can see that it has turned against you.


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## happytrader (6 October 2005)

*Re: Friendly Message to Newbie Optiontraders*

Hi Mikeg

You are obviously a seasoned player. Lets hope we saved someone today!

Happytrader


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## mikeg (7 October 2005)

Yes, I've been to the school of hard knocks. Unfortunatally I was a slow learner, did not listen to the advice that was given, and donated plenty of money to the market.


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## happytrader (7 October 2005)

Likewise friend, likewise.  I use the journal feature here as my confessional to keep me honest and on track.  Nothing like living free!

Happytrader


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## SuperTed (16 October 2005)

Depends on the situation. from a writers point of view > If its a highly volatile stock and it has moved into the money for whatever reason and time is still on yr side, most often he who panics looses the most. Most often then not the share price recovers and the naked put (on this occasion) expires worthless. As long as it was written at levels that represent fair or good fundamental value.

As an option buyer there is so much going against you before you start as well as having to be more technically correct (I read that tech analysts dont have a success rate at better then 54%).

We should start a new thread on the emotion restrainsts of being an option "trader" that only buys options vs all rounders (buyers & sellers). As i think there is a flaw in "traders" that buy only.


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## happytrader (17 October 2005)

Hello SuperTed,

Thankyou for your feedback. I agree with you about writing options at levels that represent fair or good fundamental value, absolutely. Option trading, technical analysis and the question 'is there anything fundamentally I should know about this stock negative or positive' go hand in hand. I personally do not know of any successful optiontrader who does not use technical analysis.  However, I have to disagree with holding options that have breached their stoploss. This is the No.1 reason optiontraders - naked writers and buyers blow their accounts. They might get away with 'riding their loosers' now and again but the bigger picture is they are weakening their discipline and ruining their mindset. In the end whether it be weeks or months they always blow their accounts. It is foremost a numbers game. I have often wondered if diets and optiontrading have similiar blowout levels.

Cheers

Happytrader


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## SuperTed (17 October 2005)

I will try to clarify:

1/ If you closed out each time yr option exercise was breached ignoring that you may have 4-8 weeks to expiry is a loosers mindset. Panicking looses you money! (especially if the price you wrote at values the share cheaply, the market will react) 

OR 


2/ If you wrote for 20 cents and suddenly the value of the naked put was worth 40 cents but *had not* breached your exercise price you wouldnt close out because if you had to close right then it would potentially risk x% of yr capital.


Holding yr nerve is one of the more important aspects to trading options.


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## happytrader (17 October 2005)

Hello Superted


I guess it comes down to what your return on investment expectancy is and where you place your stop losses. If you are consistently making money trading your plan, then I take my hat off to you. You are indeed a rarety.

Cheers
Happytrader


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## SuperTed (17 October 2005)

No rarity in it. I primarily write options not buy options.

Happy, Do you actually write options or are just a buyer as I beleive the mindsets are completely different.

PS: The two situations I highlighted are real world not text book waffle.


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## SuperTed (17 October 2005)

Also choppy markets like 2001-2002 and the last 2 weeks will force most buyers out if they followed yr capital rules ie got the trend wrong (as it changed fast).

As a writer if you panicked and took the loss you would be finding that the market is slightly recovering today thus there was no need to panick in the first place and exit the position espescially if you had Nov/dec options. But it wouldve broken yr capital protection rules.


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## happytrader (17 October 2005)

Good question Superted

I am a covered call writer on one particular stock and a buyer of options on a small group of low volatility stocks. You are quite right about the mindsets. When I buy options my primary focus is on taking my losses quickly to free up my mind and capital and to be ready for the next trade. My covered call strategy is based on knowing what my stock is likely to do over a certain period of time and where I am likely to find support and resistance levels and of course a decent low risk return on equity. Imo covered calls are by far the most low risk option trading strategy.

Cheers
Happytrader


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## happytrader (18 October 2005)

Hello again Superted

Had a chat today with another trader who like yourself primarily writes options and has made a six figure income for the last two years running by doing so. Because he is a writer he only has to be half right. The other point is that he writes naked calls and puts on stock he doesnt mind owning and can easily afford to do so. However, his story is somewhat different when he buys options and to date has not yet been able to report a profit on this front yet. So yes I do agree the mindsets are very different for writers and buyers of options.

Cheers
Happytrader


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