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What It Takes to Trade Options


Everyone goes at it a little differently, but nothing replaces instincts.

So a recurring theme of some of the Stockcamp speakers was a bit like what you might hear from an NFL coach. Except instead of getting up at 3 a.m. to watch game film, you get up at 4 a.m. and read charts. And if you don't, the other guy will. And since he's on the other side of the trade, you're going to have to keep up, otherwise he wins, and you're left complaining about Goldman's High Frequency Trading. Or something like that.

A guy I was talking to told me he looks at about 3,000 charts per week, although he's seen so many that he says he can look for just a couple seconds and form an impression.

And I'm there thinking, well, I don't "roll" that way. I do look at charts, but probably more like a handful a day.

Am I missing something?

Well, options are a bit of a different animal. Among other things, I know what type of option I like to trade, and that eliminates all sorts of names. I need it to be liquid. I prefer higher rather than lower prices on the underlying. I like higher volatility over lower. I want it somewhat in play.

Throw that all together, and I don't have an enormous pool to begin with. And I have most of them on my main screen, although I obviously will adjust that as new names get popular and older one's die on the vine.

For instance, the other day I added AutoZone (AZO) (short put spreads) and stopped watching Mosaic (MOS).

I look at (and post) volatility charts all the time, but again, it's not like regular stock charts. You don't need to look at the same chart more than once a week really. If you have a sense of volatility ranges of a certain name, you want to be looking at the actual trading screen for opportunities, not the volatility chart.

Which leads me to another point. Much of options trading involves an ability the look at a trading screen itself and simply develop a sense of whether there's a trade opportunity or not. Do certain puts feel cheap? Do others feel fat? No statistical measure can replace your inherent feel for whether the actual dollar price of an option compensates you for your risk or not.

Now, in all fairness, I learned to trade options on a floor, so every decision had to be made in real time. You couldn't exactly ask someone to sit on an order for a few minutes while you hit up 10 different volatility charts -- if such charts even existed then (they didn't, at least for public consumption).

Basically, you had to just know and sense volatility. Not to mention know and sense the risk/reward of every trade and how it fit into your pre-existing position.

So maybe options are just a little different. You can always work harder, and always learn, but at the end of the day it's less about poring over 14,000 charts and more about just knowing it and applying your base of knowledge to any situation.

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