Английский язык. Практический курс для решения бизнес-задач

Now brokerages are in business to make money, ours as well as everyone else’s. Everyone accepts that. And commissions are the energy source that makes it all possible. Most brokers do get some percentage of the commissions as their pay. Since most options are traded on a round-turn basis, it stands to reason that the more options the customer buys, the more money the broker makes. Therefore, the cheaper the option premium the more options the customer can buy. But not all options are created equal. For instance, let’s say gold is trading at $400 an ounce and you think gold will rally. There are usually 100 oz. «call» options offered in strike prices of $400, $410, $420, $430 and so on for a specific amount of time (there are also lower strike prices offered). Keep in mind that at expiration gold must be above your strike price to have any value. It follows then, that at expiration if gold is trading at $420 the $400 «call» option is worth $2,000 (100 ozs. X $20); but the $430 «call» is worth zero. That is why the further away from the market the strike price, the cheaper it costs to purchase. The unscrupulous option brokers will sometimes convince their clients to buy «deep out-of-the-money» options – options that are five, ten, sometimes fifteen strikes away from the underlying market. They are usually very cheap and the broker can buy a lot of them for a small amount of money and therefore rack up a large commission for him or herself. The problem is they have almost no chance of making any money for the client because the market will have to make a huge move in a relatively short period of time to pay off. And although that does happen in commodities, the odds are against it.

It is my experience that options have the greatest appreciation from roughly two to three strikes out-of-the-money to two to three strikes «in-the-money». At our firm, we discourage brokers from recommending buying options much further out than that except in special situations.

VII. Thou shalt not fight the tape. Also known as «the trend is your friend».

The mistake speculators sometimes make is trying to buy or be long while markets are still in a basic downtrend, or selling short when they are in an up trend. Most professional traders try to identify the major trend and construct their trades in that direction. They know that when you trade «with the trend» usually your chances of winning improve. Many times the trend will bail you out of an initially less than great entry point. There are many ways to analyze trends, but most involve some kind of price action like moving averages using daily or weekly charts, or somewhat more sophisticated technical indicators like stochastics or the ADX line.

VIII. Thou shalt not stay in losing trades too long. Also known as «the best trades are usually right, right away».

Let’s face it – you can’t turn a sow’s ear into a silk purse. The best trades are usually right immediately. I know a lot of commodity traders who say, stop or not, if the trade is not profitable within two or three days they’re out, cutting their losses even shorter. They don’t need to hang around just waiting to get stopped out. Experience tells them they will get stopped out. Remember, people have been trading commodities for a hundred and fifty years, the smart traders know there’s always going to be another trade. Cut your losses short.

IX. Thou shalt not follow crowds.

If you are around long enough in this business you come to have a healthy appreciation for the theory of contrary opinion. Simply stated when everyone’s bullish, sell. When everyone’s bearish, buy. That’s because historically, the public is usually wrong. But of course, it’s not quite that easy. It is extreme bullishness or bearishness that you look for. It is not enough to see a lot of bulls around. It has to be everyone and their mother is bullish, they’ve put every available dime in the market, and they think «this time it’s different» and the market will never turn bearish again, or at least not for a long time and all corrections are nothing more than buying opportunities. That’s what you look for – then you go the other way. Conversely, when the market has been flat or falling for it seems like forever and everyone’s given up, thrown in the towel, packed it in and sold out all their remaining losing positions saying «I hate this market and I’ll never trade it again.» That’s when you buy with both hands.

X. Thou shalt not step over dollars to save pennies. Also known as «get a broker.»